Banks' wilful-defaulters list under SC scrutiny

SummaryThe practice of RBI allowing banks to publish the names of wilful defaulters has come under the Supreme Court’s scrutiny for its alleged circumvention of the judicial process and legislative supervision.

The practice of RBI allowing banks to publish the names of wilful defaulters has come under the Supreme Court’s scrutiny for its alleged circumvention of the judicial process and legislative supervision.

On a petition by a Nasik-based company, DSL Enterprises Pvt Ltd, the apex court has sought replies from the finance ministry, RBI, Credit Information Bureau India (CIBIL), Bank of Maharashta and Dena Bank as to why they should be allowed to “play havoc with the firm’s social and business standing” by making its name public as a wilful defaulter. The petitioner contended that passing such judgements on the character of a person pre-eminently falls within the domain of the legislature as it involves one’s fundamental right to good reputation and challenged RBI’s giving such powers to itself.

In 2004, RBI authorised CIBIL to publish a list of defaulters of Rs 1 crore and above and also give out details of wilful defaulters of Rs 25 lakh and above against whom suits have been filed. The measure that followed the 2002 scheme that defined ‘wilful defaulters’ and terms like ‘diversion of funds’ and ‘siphoning of funds,’ was aimed at exerting moral pressure on the defaulter.

Under the securitisation ordinance, banks have the right to acquire assets of wilful defaulters. RBI later expanded the definition of wilful defaulters by including companies that try to dispose of mortgaged properties without the knowledge of the lenders. In July this year, RBI issued a master circular combining all its instructions and directions in this regard, with a view to making available credit information pertaining to willful defaulters to banks and blocking further bank finance to these firms.

DSL has challenged the legality and validity of various RBI circulars and certain provisions of the Companies (Regulation) Act 2005 that allow the banks to declare the names of defaulters on the CIBIL website. “These draconian powers given by RBI to the banks play with a person’s fundamental right to the good reputation,” the firm alleged, adding that there is an implied duty of utmost care imposed on a banker before disclosing the credit assessment of its constituents.

The SC directive to the government and RBI to respond to the DSL’s petition comes at a time the central bank is already faced with attempts construed to impinge on its autonomy. The RBI, the country’s monetary authority and banking regulator, has voiced concern over the new statutory committee on hybrid products regulation and the mandate being given to the proposed Financial Stability Development Council.

According to DSL’s petition, formulation of such a definition “wilful defaulter” for characterisation of persons pre-eminently falls within the exclusive dominion of the legislature and “RBI cannot and ought not to have arrogated the right to itself especially when stigmatisation brings adverse legal and social consequences on a citizen including his fundamental right to a good reputation.”

DSL through its counsel Jatib Zaveri submitted that the entire process set up by RBI is “extremely ad hoc, haphazard and in the name of controlling the instances of wilful defaulter puts oppressive and absolute powers in the private hands of the banks and FIs without any recourse for the affected person to judicial proceedings and without legislative supervision.” Such declaration as wilful defaulters entails evil civil consequences and social stigmas besides attracting embargos stipulated by RBI like prevention of access to capital markets, refusal of financial facilities by any bank, change of management of the unit, and ouster of a wilful defaulting company’s director from any other company, Zaveri said.

“The business world attaches great importance to the credit opinion of the bank of a given person and if it is indicative of dishonesty, such finds it almost impossible to carry on its business. It is a wider and deeper blacklisting travelling far beyond business of banking. No bank/FI/Credit dispensing company/telephone company/stock broker/Sebi/ NBFCs will deal with such an entity and such entity is, therefore, isolated as an outcast from the commercial network,” the petition stated.

Seeking to restrain the banks from declaring and publishing in any manner the names of Datar Switchgear Ltd and its directors or guarantors as wilful defaulters through any media including the World Wide Web or an immediate direction to withdraw the same if already declared, DSL said that it had no commercial or banking transactions at any time with the Dena Bank and despite that CIBIL had published its name in the category of defaulters qua Dena Bank for Rs 10.57 crore.

The Bank of Maharashtra had declared the firm as wilful defaulter through open publications by CIBIL without affording any opportunity being heard, DSL said, adding “the insinuation/stigma of wilful default’ has been attached despite knowing and agreeing to the facts to the contrary and without affording any opportunity of hearing to the petitioners at any stage,”

It is submitted that DSL is revived under a Rehabilitation Scheme sanctioned by BIFR and thus the bank’s claim had been restructured and there had been never been a default in payment to the Banks in terms of the santioned scheme. Neither banks nor CIBIL nor RBI has taken corrective measure despite various reminders, it said, adding the respondent were trying to wriggle out of the situation by saying that impugned circulars and the Act do not provide any remedy.